Markets
Emerging Markets Are Not All Created Equal
For most investors, targeting foreign countries where there are high expectations for growth is a useful strategy.
After all, in the United States, Canada, and Europe, economies are mostly growing at about 2% or less per year. And while these developed markets are less risky to invest in, finding value can be tricky.
That’s why for many decades, investors have been allured by the fast growth of far-off economies. In the 1950s and 1960s, Japan’s economy regularly expanded at a 10%+ clip, and who can forget the “Four Asian Tigers” that followed in Japan’s footsteps? In the 2000s, the focus shifted to the BRICS (Brazil, Russia, India, China, South Africa) – and more recently, attention has been on countries like Indonesia, Nigeria, Colombia, and Turkey.
Different Risks in Emerging Markets
Although emerging markets are similar in that they have high expectations for growth, it’s important to remember that these countries have very unique and different sets of risks.
Today’s visualization comes to us from Charles Schwab, and it provides a simple breakdown of the types of risks faced by the economies of emerging markets:
As an example, Mexico and Chile have considerably different risks, according to the chart.
Aside from currency risk, which they both share, Chile is particularly prone to sensitivity in the world’s commodity markets. That makes sense, because Chile is the world’s largest supplier of copper – and close to 50% of the country’s exports are copper-related, including refined copper (22.6%), copper ore (20.9%), raw copper (3.6%), and copper wire (0.5%).
On the other hand, Mexico is noted as having particular sensitivity to what happens in developed markets such as the United States. This is because 81% of Mexican exports go to the U.S., while the next biggest buyer of Mexican goods is Canada at 3% of exports. If the buying power of the U.S. and Canada is affected, it could have big consequences on what will be bought from Mexico.
Markets
How Disinflation Could Affect Company Financing
History signals that after a period of slowing inflation—also known as disinflation—debt and equity issuance expands.
How Disinflation Could Affect Company Financing
The macroeconomic environment is shifting. Since the second half of 2022, the pace of U.S. inflation has been dropping.
We explore how this disinflation may affect company financing in Part 2 of our Understanding Market Trends series from Citizens.
Disinflation vs. Deflation
The last time inflation climbed above 9% and then dropped was in the early 1980’s.
| Time Period | March 1980-July 1983 | June 2022-April 2023* |
|---|---|---|
| Inflation at Start of Cycle | 14.8% | 9.1% |
| Inflation at End of Cycle | 2.5% | 4.9% |
* The June 2022-April 2023 cycle is ongoing. Source: Federal Reserve. Inflation is based on the Consumer Price Index.
A decrease in the rate of inflation is known as disinflation. It differs from deflation, which is a negative inflation rate like the U.S. experienced at the end of the Global Financial Crisis in 2009.
How might slowing inflation affect the amount of debt and equity available to companies?
Looking to History
There are many factors that influence capital markets, such as technological advances, monetary policy, and regulatory changes.
With this caveat in mind, history signals that both debt and equity issuance expand after a period of disinflation.
Equity Issuance
Companies issued low levels of stock during the ‘80s disinflation period, but issuance later rose nearly 300% in 1983.
| Year | Deal Value |
|---|---|
| 1980 | $2.6B |
| 1981 | $5.0B |
| 1982 | $3.6B |
| 1983 | $13.5B |
| 1984 | $2.5B |
| 1985 | $12.0B |
| 1986 | $24.2B |
| 1987 | $24.9B |
| 1988 | $16.9B |
| 1989 | $12.9B |
| 1990 | $13.4B |
| 1991 | $45.2B |
| 1992 | $50.3B |
| 1993 | $95.3B |
| 1994 | $63.7B |
| 1995 | $79.7B |
| 1996 | $108.7B |
| 1997 | $106.5B |
| 1998 | $97.0B |
| 1999 | $142.8B |
| 2000 | $156.5B |
Source: Bloomberg. U.S. public equity issuance dollar volume that includes both initial and follow-on offerings and excludes convertibles.
Issuance grew quickly in the years that followed. Other factors also influenced issuance, such as the macroeconomic expansion, productivity growth, and the dotcom boom of the ‘90s.
Debt Issuance
Similarly, companies issued low debt during the ‘80s disinflation, but levels began to increase substantially in later years.
| Year | Deal Value | Interest Rate |
|---|---|---|
| 1980 | $4.5B | 11.4% |
| 1981 | $6.7B | 13.9% |
| 1982 | $14.5B | 13.0% |
| 1983 | $8.1B | 11.1% |
| 1984 | $25.7B | 12.5% |
| 1985 | $46.4B | 10.6% |
| 1986 | $47.1B | 7.7% |
| 1987 | $26.4B | 8.4% |
| 1988 | $24.7B | 8.9% |
| 1989 | $29.9B | 8.5% |
| 1990 | $40.2B | 8.6% |
| 1991 | $41.6B | 7.9% |
| 1992 | $50.0B | 7.0% |
| 1993 | $487.8B | 5.9% |
| 1994 | $526.4B | 7.1% |
| 1995 | $632.7B | 6.6% |
| 1996 | $906.0B | 6.4% |
| 1997 | $1.3T | 6.4% |
| 1998 | $1.8T | 5.3% |
| 1999 | $1.8T | 5.7% |
| 2000 | $2.8T | 6.0% |
Source: Dealogic, Federal Reserve. Data reflects U.S. debt issuance dollar volume across several deal types including: Asset Backed Securities, U.S. Agency, Non-U.S. Agency, High Yield, Investment Grade, Government Backed, Mortgage Backed, Medium Term Notes, Covered Bonds, Preferreds, and Supranational. Interest Rate is the 10 Year Treasury Yield.
As interest rates dropped and debt capital markets matured, issuing debt became cheaper and corporations seized this opportunity.
It’s worth noting that debt issuance was also impacted by other factors, like the maturity of the high-yield debt market and growth in non-bank lenders such as hedge funds and pension funds.
Then vs. Now
Could the U.S. see levels of capital financing similar to what happened during the ‘80s disinflation? There are many economic differences between then and now.
Consider how various indicators differed 10 months into each disinflationary period.
| January 1981 | April 2023* | |
|---|---|---|
| Inflation Rate Annual | 11.8% | 4.9% |
| Inflation Expectations Next 12 Months | 9.5% | 4.5% |
| Interest Rate 10-Yr Treasury Yield | 12.6% | 3.7% |
| Unemployment Rate Seasonally Adjusted | 7.5% | 3.4% |
| Nominal Wage Growth Annual, Seasonally Adjusted | 9.3% | 5.0% |
| After-Tax Corporate Profits As Share of Gross Value Added | 9.1% | 13.8% |
* Data for inflation expectations and interest rate is as of May 2023, data for corporate profits is as of Q4 1980 and Q1 2023. Inflation is a year-over-year inflation rate based on the Consumer Price Index. Source: Federal Reserve.
The U.S. economy is in a better position when it comes to factors like inflation, unemployment, and corporate profits. On the other hand, fears of an upcoming recession and turmoil in the banking sector have led to volatility.
What to Consider During Disinflation
Amid uncertainty in financial markets, lenders and investors may be more cautious. Companies will need to be strategic about how they approach capital financing.
- High-quality, profitable companies could be well positioned for IPOs as investors are placing more focus on cash flow.
- High-growth companies could face fewer options as lenders become more selective and could consider alternative forms of equity and private debt.
- Companies with lower credit ratings could find debt more expensive as lenders charge higher rates to account for market volatility.
In uncertain times, it’s critical for businesses to work with the right advisor to find—and take advantage of—financing opportunities.
Learn more about working with Citizens.
-
Politics2 weeks agoCharting the Rise of America’s Debt Ceiling
By June 1, a debt ceiling agreement must be finalized. The U.S. could default if politicians fail to act—causing many stark consequences.
-
Wealth2 weeks agoRanked: The World’s Top 50 Endowment Funds
Endowment funds represent the investment arms of nonprofits. See the worlds top 50, which collectively have over $1 trillion in assets.
-
Demographics2 weeks agoVisualizing the American Workforce as 100 People
Reimagining all 200 million of the American workforce as 100 people: where do they all work, what positions they hold, and what jobs they do?
-
Markets4 weeks agoVisualized: Real Interest Rates by Country
What countries have the highest real interest rates? We look at 40 economies to analyze nominal and real rates after projected inflation.
-
Markets2 months agoRanked: The Largest Bond Markets in the World
The global bond market stands at $133 trillion in value. Here are the major players in bond markets worldwide.
-
Markets2 months agoVisualized: The Largest Trading Partners of the U.S.
Who are the biggest trading partners of the U.S.? This visual showcases the trade balances between the U.S. and its trading partners.
-
Batteries2 weeks agoHow EV Adoption Will Impact Oil Consumption (2015-2025P)
-
Money4 weeks agoVisualizing the Assets and Liabilities of U.S. Banks
-
Wealth2 weeks ago
Ranked: The World’s Top 50 Endowment Funds
-
Markets4 weeks ago
Visualized: Real Interest Rates by Country
-
Politics2 weeks ago
Charting the Rise of America’s Debt Ceiling
-
Money3 weeks agoComparing the Speed of Interest Rate Hikes (1988-2023)
-
United States2 weeks agoRanked: The Cities with the Most Skyscrapers in 2023
-
War3 weeks agoMap Explainer: Sudan